This blog connects to the AXEC Project which applies a superior method of economic analysis. The following comments have been posted on selected blogs as catalysts for the ongoing paradigm shift. The comments are brought together here for information. The full debates are directly accessible via the Blog-References. Scrap the lot and start again - that is what a paradigm shift is all about. Time to make economics a science.

July 19, 2016

Feeble minds, shaky assumptions, and the inevitable failure of economics

Every perceived event is a hard to unravel clew of unique space/time specifics, eternal laws/invariants, and free target-oriented human action. The flow of events is a clew of regularities, novelties, and apparent randomness. In order to think about a smaller or bigger section of reality it is imperative to simplify/abstract/idealize the perceived flow of events. This is known to every economist since J. S. Mill.

“Since, therefore, it is vain to hope that truth can be arrived at, either in Political Economy or in any other department of the social science, while we look at the facts in the concrete, clothed in all the complexity with which nature has surrounded them, and endeavour to elicit a general law by a process of induction from a comparison of details; there remains no other method than the à priori one, or that of ‘abstract speculation’.” (1874, V.55)

What we call ‘the economy’ is an abstract mental construct. Nobody can see or touch or experience ‘the economy’. From the history of science, though, it is known that simplification/abstraction/idealization can go badly wrong. This happened in economics as almost everybody has realized by now. To better see want went wrong, here is the famous prototype of how ‘abstract speculation’ is done and how it finally approaches the complexity of reality with the highest possible degree of perfection. The prototype comes from physics but the step-by-step process can be customized for other disciplines. Mindless one-to-one copying of the procedure is, of course, not such a good idea.

“The Principia begins with an idealized world, a simple mental construct, a ‘system’ of a single mathematical particle and a centrally directed force in a mathematical space. Under these idealized conditions, Newton freely develops the mathematical consequences of the laws of motion that are the axioms of the Principia. At a later stage, after contrasting this ideal world with the world of physics, he will add further conditions to his intellectual construct ― for example, by introducing a second body that will interact with the first one and then exploring further mathematical consequences. ... In this way he can approach by stages nearer and nearer to the condition of the world of experiment and observation, introducing bodies of different shapes and composition and finally bodies moving in variant types of resistant mediums rather than in free space.” (Cohen, 1994, p. 77)

Orthodox economics, too, starts with an idealized world. There is NOTHING WRONG with that in general but ALL is wrong in particular because: “The program is organized around the following hard core propositions:
HC1. There exist economic agents.
HC2. Agents have preferences over outcomes.
HC3. Agents independently optimize subject to constraints.
HC4. Choices are made in interrelated markets.
HC5. Agents have full relevant knowledge.
HC6. Observable economic outcomes are coordinated, so they must be discussed with reference to equilibrium states.” (Weintraub, 1985, p. 109)

The problem with this axiom set is NOT that it defines an idealized world but that it defines a world that does not and cannot possibly exist. HC3 or HC5 do not define limiting cases of reality like friction-free motion but introduce NONENTITIES, that is, entities like angels, unicorns, Spiderman, or the Easter Bunny. In addition, there is no such thing as an equilibrium in the economy. Methodologically, HC6 is what is known since antiquity as petitio principii. This is a quite primitive methodological blunder.

Clearly, when only one of the foundational propositions fails the whole formal basis breaks apart and with it the whole theoretical superstructure. In general terms, the fatal fault of Orthodoxy is that it is based upon behavioral assumptions which can, as a matter of principle, not be other than shaky. In other words, Orthodoxy does not satisfy Aristotle’s definition of science: “When the premises are certain, true, and primary, and the conclusion formally follows from them, this is demonstration, and produces scientific knowledge of a thing.” There is no such thing as a ‘certain, true, and primary’ behavioral premise. The fatal mistake/error is to define economics as a behavioral science.

Because of this, there is no other way out of the calamity than to reconstruct economics entirely WITHOUT the concepts of constrained optimization, rational expectations, equilibrium and other nonentities. In methodology this is called a paradigm shift: “There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean.” (Ingrao et al., 1990, p. 362)

Obviously, there is until this very day ‘no indication of what it might mean’ to do economics without nonentities. Traditionally, heterodox economists have always been very clear about that the neoclassical axioms are unacceptable but they have not come forward with a concrete proposal how to replace them.

Just like Orthodoxy, traditional Heterodoxy could not solve the starting problem, which consists in defining the elementary monetary economy in simple/abstract/idealized and consistent terms. Many heterodox economists do not even understand the starting problem. J. S. Mill put it thus:

“What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy.” (2006, p. 746)

Krugman has clearly told the world “... most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point.”

Traditional Heterodoxy has always been very outspoken that these premises are “unrealistic” or “shaky” but never told the world what the ‘certain, true, and primary’ premises of economics are. And this is how Heterodoxy has become part of the problem and in fact one of the many obstacles for economics to become what it claims already since Adam Smith to be: a science. Both, orthodox and heterodox economics, is nothing more than storytelling and a more or less plausible myth.

Egmont Kakarot-Handtke

References
Cohen, I. B. (1994). Natural Images in Economic Thought, chapter Newton and the Social Sciences, With Special Reference to Economics, or, the Case of the Missing Paradigm, pages 55–90. Cambridge: Cambridge University Press.
Ingrao, B., and Israel, G. (1990). The Invisible Hand. Economic Equilibrium in the History of Science. Cambridge, MA, London: MIT Press.
Mill, J. S. (1874). Essays on Some Unsettled Questions of Political Economy. On the Definition of Political Economy; and on the Method of Investigation Proper To It. Library of Economics and Liberty. URL
Mill, J. S. (2006). Principles of Political Economy With Some of Their Applications to Social Philosophy, volume 3, Books III-V of Collected Works of John Stuart Mill. Indianapolis, IN: Liberty Fund. URL
Weintraub, E. R. (1985). General Equilibrium Analysis. Cambridge, London, New York, NY, etc.: Cambridge University Press.

(i) You made the assertion “... there are no certain, true, and primary premises of economics, ...” without giving a proof or citing a proof.

(ii) In direct refutation of your purely rhetorical assertion I gave you the certain, true, and primary structural axiom set as a replacement for the false Walrasian microfoundations and the false Keynesian macrofoundations.

(iii) You now have two options either (a) to prove your unfounded assertion (i) ex post, or (b), to empirically disprove one of the many theorems that follow from the certain, true, and primary macrofoundations (ii) yourself or to follow the standard procedure and let econometricans do the test.*

The ball is in your field. I am looking forward to the results of empirical testing.

Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency. Scientific truth is double-checked, everything else is blather, storytelling, gossip, rhetoric, propaganda, sitcom, etcetera.

The very characteristic of a scientific proposition/theory is that it is open to logical and empirical proof/disproof. In general terms, the sole task of the scientist is to produce logically and materially consistent propositions about a segment of reality: “A theory is the more impressive the greater the simplicity of its premises, the more different kinds of things it relates, and the more extended is its area of applicability.” (Einstein, quoted in Brown, 2011, p. 244)

You say: “The question that any social science must answer is ‘why is there durability?’”

I say:
(i) Economics is NOT a social science but a system science. Your specification of the subject matter is false to begin with.
(ii) Economics has to answer the question of how the monetary economy works.
(iii) Iron Law of methodology: No way leads from the understanding of human behavior to the understanding of how the economy system works.
(iv) Orthodox economics is built upon subjective-behavioral axioms. Because of (iii) this is the false starting point. In addition: From green-cheese behavioral assumptions, e.g. utility maximization, no testable proposition ever follows. Second-guessing human behavior has always been and will always be a pointless exercise.*
(v) Economics has to be built upon objective-structural axioms.
(vi) From objective-structural axioms follow testable propositions about the relationships of measurable economic variables. The two most important of theses relationships are the Profit Law and the employment equation. There can be no doubt that it is of utmost importance for an economist to know the Profit Law. The actual situation is that the representative economist cannot even tell what profit is. This includes all Nobel Prize winners.
(vii) All questions about human nature/behavior/action have to be left to psychology, sociology, anthropology, political science, etcetera. Knowledge about human behavior is imported into economics from these disciplines IF NEEDED. Economics is NOT a science of behavior (2011).
(viii) In order to become a science economics has to move from shaky subjective-behavioral microfoundations to solid objective-structural macrofoundations (2014) and to refrain entirely from political agenda pushing.

* “The disciplines that we currently call ‘social sciences’ may accumulate gossip or spot correlations, but Rosenberg believes they will never succeed in formulating laws and theories with the force and fruitfulness of those in the natural sciences.” (Hausman, 1992, p. 326). In other words, the term ‘social sciences’ is a misleading pretension. Feynman aptly called them cargo cult sciences.

I am on one page with Capra.
(i) I say that economics is a systems science, he titles one of his books: “The Systems View of Life: A Unifying Vision.”
(ii) He says: “What makes the scientific enterprise feasible is the realization that, although science can never provide complete and definitive explanations, limited and approximate scientific knowledge is possible.” I hasten to add that non-science cannot, as a matter of principle, provide any explanations at all.
(iii) Capra enumerates the main deficiencies of orthodox economics (1983, ch. 7). I prove that economics is a failed science.
(iv) Methodologically: “All of physics has to follow uniquely from the requirement that its components be consistent with one another and with themselves.” (1983, p. 92) This brings us directly to the shaky axiomatic foundations of economics.*

Where things go awry is: Capra (a) does not understand how the economic system (= monetary economy works), (b) has no idea what profit is and how the profit mechanism works, (c) has not gotten the crucial point of a paradigm shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug, 1998, p. 703)

Capra argues from the highest peaks of theoretical physics down to actual theoretical economics. The insights of quantum physics or relativity theory, though, are completely irrelevant for economics because economics is still at the proto-scientific level and has not even arrived at something like Archimedes’s Law of the Lever. It is lagging more than 2000 years behind: “Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (von Neumann, quoted in Ingrao et al. 1990, p. 197)

For economists Descartes is NOT outdated. These confused blatherers and silly agenda pushers have still a long way to go until they arrive at Descartes’s level of rigorous thinking. Economists have no Cartesian clarté about their foundational concepts profit and income.

To tell people who cannot even define the systemic relations of an elementary consumption economy (2012; 2014) that they need apply the tools of complexity theory is beyond absurd.

Orthodoxy is false. But Orthodoxy bashing is not enough. It even becomes a bit comical when it is done by unqualified heterodox folks who recommend ‘Science and Spirituality’ but have never produced a testable economic proposition and insist: “I don’t have to prove anything.” (Zimmerman Jul 22)

Note, the first rule of science says: If it cannot be proved it cannot be accepted to the corpus of scientific knowledge. It is just another repugnant instance of storytelling, cargo cult science, or economics.

In the philosophers’ section* of this economics blog you communicated your most profound insight: “Like all of life, including human communities ‘freedom to’ is complex and its evolution uncertain.”

True, even trivially true. But you are not only a philosopher on a par with Socrates (I know that I know nothing) but also an expert on scientific methodology and kindly enlighten me and the world: “But you miss the really basic point before this one. That the components of physics have to be consistent with observations (with experience, experimental and otherwise). A logically, even mathematically self-consistent framework is useless and misleading if it is not consistent with observations.”

True, except for: “But you miss the really basic point before this one.” It seems, your attention span is even shorter than that of a fruit fly.

In the immediately preceding post of Jul 22 I wrote: “Science is special because it is the systematic attempt to establish truth which in turn is well-defined by material AND formal consistency.” Note that AND is in capital letters. So, as a matter of provable fact**, I missed nothing.

I even realized that you are the most prolific blatherer near and far and that means something given the abundance of white-noise producers on economics blogs in general. And this in turn only proves that BOTH Orthodoxy AND Heterodoxy are way below the scientific level. Nothing has changed since von Neumann wrote this: “You know, Oskar, if those books are unearthed sometime a few hundred years hence, people will not believe they were written in our time. ... Economics is simply still a million miles away from the state in which an advanced science is, such as physics.” (quoted in Ingrao et al. 1990, p. 197) In fact, economics is not even at the level of Archimedian mechanics and Cartesian logic.

Orthodox economics is based on shaky assumptions, a.k.a. Walrasian axioms. To accept these axioms is an incontrovertible proof of scientific incompetence. This holds for Orthodoxy since more than 140 years. So, Heterodox Economists of the World!, what are the certain, true, and primary axioms of economics? To say that reality is complex and its evolution is uncertain and that science is hard does not count as an answer.***

The hybrid science

As a first approximation, one can agree on the general characteristic that the economy is a complex system.

However, with the term system one usually associates a structure with components that are non-human. In order to stress the obvious fact that humans are an essential component of the economic system the market economy should be characterized more precisely as a complex hybrid human/system entity or sys-hum.

The scientific method is straightforwardly applicable to the sys-component but not to the hum-component. While it is clear that the economy always has to be treated as an indivisible whole, for good methodological reasons the analysis has to start with the objective system-component.

In gestalt-psychological terms the economic system is the foreground, individual behavior the background. Common sense wrongly insists that the hum-component must always be in the foreground. This fallacy compares to Geo-centrism. The economic system has its own logic which is different from the behavioral logic of humans. The systemic logic is what Adam Smith called the Invisible Hand.

There are systemic laws but no behavioral laws. Systemic laws have the same methodological status as physical laws.

Neither Orthodoxy nor Heterodoxy can tell what the systemic laws of the actual monetary economy are.

Whether the outcome of the human/system-interaction is good or bad is a politcal question that lies outside of theoretical economics. Theoretical economics explains how the actual economy works - no less, no more.

First Economic Law ®

Narrative vs.Theory

Psychological, sociological or behavioral assumptionism cannot yield anything other than a gossip model of the world. Second-guessing the agents is not economic analysis.

Storytelling is the original mode of communication in the social realm — except science.

Political economics is storytelling and, by default, the natural habitat of confused confusers. Walrasianism, Keynesianism, Marxianism, Austrianism are social narratives and not scientifically valid representations of reality.

"The truth is, most persons, not excepting professional economists, are satisfied with very hazy notions." (Fisher)

In marked contrast, theoretical economics lives up to the standards of material and formal consistency. A scientific theory is the best representation of reality that is humanly possible.

Paradigm shift

"The problem is not just to say that something might be wrong, but to replace it by something — and that is not so easy." (Feynman)

"As will become evident, there is more agreement on the defects of orthodox theory than there is on what theory is to replace it: but all agreed that the point of the criticism is to clear the ground for construction." (Nell)

"The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory." (Blaug)

"The task of producing knowledge against the grain requires imagination." (Mirowski)

"A new idea is extremely difficult to think of. It takes a fantastic imagination." (Feynman)

"The scientific imagination dreams of explanations and laws." (Peirce)

"It is brilliance of imagination which makes the glory of science." (Evans)

"... we know little more now about ‘how the economy works,’ ... than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations." (Clower)

The Starting Problem or What are your axioms?

"What are the propositions which may reasonably be received without proof? That there must be some such propositions all are agreed, since there cannot be an infinite series of proof, a chain suspended from nothing. But to determine what these propositions are, is the opus magnum of the more recondite mental philosophy."

To be replaced (1)

The core premises of Orthodoxy are uncertain and false and this fully explains the failure of the research program.

“As with any Lakatosian research program, the neo-Walrasian program is characterized by its hard core, heuristics, and protective belts. Without asserting that the following characterization is definitive, I have argued that the program is organized around the following propositions: HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

This elementary syllogism is demonstrably false. The demonstration consists in the proof that Keynes could not solve the Profit Puzzle. Neither did Post-Neo-New-Keynesians.

In the most general terms, the economics paradigm shift consists in switching from the behavior-centric bottom-up approach to the structure-centric top-down approach. This is comparable to the Copernican turn from Geo-centrism to Helio-centrism.

Paradigm shift

Walrasianism, Keynesianism, Marxianism, Austrianism is provable false and this requires the shift to an entirely new paradigm

AXEC-Meme

If it isn’t macro-axiomatized, it isn’t economics.

Consensus

Economics is a science without scientists. Because they are ignorant of the elementary difference between profit and income, the present generation of economists has not made and cannot make a significant contribution to the discussion about how the actual economy works.

Every orthodox or heterodox economist can convince himself/herself that their profit theory is defective.

Because the profit theory is false the whole of conventional economic theory has to be rejected.

"What is now taught as standard economic theory will eventually disappear, no trace of it will remain in the universities or boardrooms because it simply doesn’t work: were it engineering, the bridge would collapse." (McCauley)

No scientist will ever accept Walrasianism, Keynesianism, Marxianism, or Austrianism. These approaches are logically and/or empirically refuted. This is the actual methodological state-of-the-art. Walrasians, Keynesians, Marxians, or Austrians are still at the proto-scientific stage. These approaches cannot be improved, only abandoned.

Economists are a public nuisance because they have an opinion on everything but knowledge of nothing.

Nopopop

This blog does not add to any popular/un- popular opinion.

This blog does not hand out advice about how to avoid taxes, to get rich on the stock market, to be successful in business, to increase the wealth of nations, to run an economy, to maximize welfare, to prevent national/global bankruptcy, to improve the institutional setup of society, to get out of national/global depression, nor about how to save humankind or any subgroup thereof.

This blog is about the true theory of the actual monetary economy.

"In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Redefining economics

Old definition, subjective-behavioral:

Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.

New definition, objective-systemic:

Economics is the science which studies how the monetary economy works.

From proto-science to science

Political economics is scientifically worthless since more than 200 years

Focus

Science is of primary interest and importance. Scientists are of secondary interest. The general public finds it remarkable that one of Einstein’s peculiar habits was to never wear socks. In marked contrast, physicists find alone his field equations remarkable.

With regard to science most people lose focus easily because of a natural preference for anecdotes over facts or subjectivity over objectivity.

Hence, Schumpeter once considered it necessary to remind his habitually disoriented fellow economists: “Remember: occasionally, it may be an interesting question to ask why a man says what he says; but whatever the answer, it does not tell us anything about whether what he says is true or false.”

Disclaimer

Missing Blog-Reference links: AXEC does not guarantee that their comments can at any time be recovered from where they have been posted intitially because the availability depends on the publication policy of the blog owner which is implicitly accepted on entering a debate. See also: 'Economists: Incompetent? Stupid? Corrupt?'

Texts: Parts of arbitrary length of any of the author's texts is and will be used again by the author in papers, books, websites, blogs, and other media without explicit reference. The right to make corrections or minor textual improvements on reutilization is reserved.

Caution: Do not expect a corroboration of your political view. Neither a refutation. Political economics has been scientifically worthless since Adam Smith. Politics has to be separated from economics because it is categorically different from science.The best science can do and has always done is to prove beyond reasonable doubt that you have been objectively wrong or ignorant until now. Science goes beyond the naive common sense of today and becomes the sophisticated common sense of tomorrow.

Motto

The Scrap-the-lot citation in the intro is from Joan Robinson.

Outlook

To recall, while political economics is storytelling, theoretical economics adheres to scientific standards.

The first task of theoretical economics is to get the axiomatic foundations right. This is what J. S. Mill called the opus magnum. Neither Orthodoxy nor Heterodoxy came up with a reasonable solution until this day. This explains the secular stagnation of economics.

There is no serious alternative to structural axiomatic economics. This is not a matter of opinion but of proof. The sole criteria are material and formal consistency.

All truths are easy to understand once they are discovered; the point is to discover them.

Galileo Galilei

The Profit Law ®

The Law of Supply and Demand ®

Law of Value ®

Employment equation ®

Time evolution of the economic system ®

The Economics God Equation embodies the open simulation of the elementary consumption economy from t=0 to infinity

Major economic policy implication

The price mechanism does not work as standard economics hypothesizes. The axiom-based employment equation states that overall employment increases if the average wage rate increases relative to average price and productivity. This gives one the lever to improve the employment situation all over the world and to fend off deflationwithout rising debt and without artificial capacity growth. To increase the average price relative to the average wage rate and productivity increases unemployment. This is what happens at the moment with the Fed's inflation goal.

Right policy depends on true theory.

“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Lacking the true theory, economists promote since more than 200 years opinion instead of knowledge.

From microfoundations to macrofoundations

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